Investors, both big and small, have been through a tumultuous year so far, with the S&P 500 (SPX) down about 22% year-to-date. As investors are constantly looking for the best places to park their cash in the stock market, or looking to change their investment strategies, it can be hard for many newcomers to know whether a stock purchase is good or not. The five-part checklist mentioned below will help you determine exactly that.
Don't Miss our Black Friday Offers:
- Unlock your investing potential with TipRanks Premium - Now At 40% OFF!
- Make smarter investments with weekly expert stock picks from the Smart Investor Newsletter
Meanwhile, severe market volatility has left many investors purposely not taking any action, as many are waiting for the uncertainty to pass by. In a recent Bankrate survey, around 56% of U.S. investors mentioned that they have intentionally not made any moves amid market volatility. What’s more, 62% of investors said they are not making any changes to their investments this year because of elevated inflation.
In a recent move by the Federal Open Market Committee (FOMC), Chair Jerome Powell announced that the Federal Reserve would increase its prime interest rate by 75 basis points, boosting the cost of borrowing to its highest levels since 2007. This marks the third aggressive rate hike in the Fed’s battle to tame rampant running inflation.
With so much uncertainty in the market and with some economists suggesting a looming recession on the horizon, investors have been scrambling in all sorts of directions as a way to shield themselves against the possibilities of a broader economic downturn.
Five Things That Make a Solid Investment
Whether you’re a seasoned professional or only recently started your investor journey, there is truly no real way to tell how your stocks will perform, but you can improve your odds of success through research.
1. You Know the Company and the Sector it Operates In
The best way to know if you’re making a solid investment is by seeing if you can describe what the company does and how it makes money. Additionally, this would mean you also consider the industry or the sector it operates in.
This requires you to take some time to study the company, its inner workings, and how it operates among competitors in the border marketplace.
Once you have an idea of the type of companies you want to invest in, you can start by researching their financial performance throughout the past few years. You can also take a look at how the company has managed financial hardships in the past and how it treated its investors during periods of sudden economic downturn.
2. The Company Has a Competitive Business Model
Consumer loyalty has become an integral part of any business or large-scale company as the marketplace becomes increasingly competitive with the advent of e-commerce.
To ensure profitability, many companies provide consumers with products and services that can outperform those of their direct competitors.
Suppose you notice that a company has a strong track record for offering its customers a high-quality and value-driven experience, building trust, and instilling loyalty. In that case, there’s a good chance that its stock may deliver a solid performance in the long term.
Investors can also look at how well these companies performed when faced with uncertain market challenges or even shifting consumer interests.
Think of high-profile companies such as Apple (NASDAQ: AAPL), Amazon (NASDAQ: AMZN), or even Kroger (NYSE: KR) – these companies offer both a product and service that is highly competitive, but during times of economic hardships, they can continue performing strongly, as they have built a loyal consumer following.
3. There is Steady Revenue Growth
When shopping around for stocks, investors tend to investigate a company’s revenue growth. While many different facets can make up a company’s revenue stream, it’s important for investors to measure the company’s revenue growth and how executives are directing cash and profits towards future opportunities.
Before buying shares of a company, consider its overall financial position and also have a look at historical revenue figures. This will help you establish a better understanding of how the company has expanded in the last few years.
If you notice that there has been a decrease in sales, consider a few factors that could have caused this and how the company managed to overcome financial challenges.
4. The Company Has a Forward-Looking Strategy
Having a forward-looking strategy is more than simply planning for the months ahead, but rather establishing business-related goals and the steps needed to achieve these milestones.
If a company has a solid, forward-looking strategy that outlines its missions for the next few years ahead, it’s usually a positive sign that the company is in a good position.
The forward-looking strategy should outline how the company will be investing in its employees, research and development, and customers.
What’s interesting is that the company generally shares these sorts of blueprint ideas at quarterly or annual earnings calls. So, it’s good to know that as a potential investor, you will have easy access to this sort of information.
5. There is a Sustainable Return on Capital
Investors can use the return on the capital metric to determine how successful a company is, which can influence the deciding factor on whether a particular stock is a solid investment.
Ultimately, capital investments should be used to help companies expand, resulting in a higher return on capital. Investors can calculate this by dividing the company’s net operating profit after taxes by the combination of debt and equity.
Generally speaking, economic experts and seasoned investors tend to argue that any figure above 10% is good for this metric. Of course, this would all depend on the amount invested and the type of industry in which the company operates.
Companies that can outperform their peers or direct competitors are also in a healthy position, and this could be a good indication for investors to direct their attention toward these sorts of high-quality stocks.
Final Thoughts
Due to high market volatility, many investors have decided to halt their stock purchases this year, with the majority of them not looking to make any sudden moves that will ultimately impact their portfolios and overall stock performance.
As a company grows and increases its standing within its given marketplace, investors should consider how this will help drive its stock price higher and what their return on the stock may be. Finally, investors should take the time to research the companies they’re interested in but also diversify their portfolios enough so that they will be able to shield themselves even if the economy takes a dip.
